FIN 300 Lecture Notes - Lecture 8: Tax Rate, Machine Press, Tax Shield
17 Nov 2016
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Revenue Generating Project
• Company X is planning a project requiring $340,000 investment in equipment (class 16, d=40%).
NWC stays at the same level of $55,000 for 7 years of the project live. The equipment can be
sold after 7 years for estimated $75,000. Required return is 12.5%, marginal tax rate is 45%.
Estiated preset value of after tax operatig icoe is ,.. What is the project’s NPV?
• Investment- -340,000
• NWC= -55000
• PV of NWC Recovery-?
• PV of salvage value-?
• PV of (S-C)*91-T)-495,548.33
• PV of CCA Tax shield- 98,820.49
• NPV= 256,368.25
• USE THE FORMULA- CANNOT USE CASIO CALCULATOR- USE TEXAS INSTRUMENTS CALCULATOR
• PV of NWC Recovery= 55,000/(1+0.125)7 = 23,115,43
• PV of salvage= 75,000/ (1+0.125)7= 32, 884. 68
Cost Cutting Project
Firm C is considering a four-year project to improve its production efficiency. Buying a new machine
press for $560,000 is estimated to result in $210,000 in annual pre-tax cost savings. The press falls into
Class 8 for CCA purposes (CCA rate of 20 %), and it will have a salvage value at the end of the project of
$80,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an
additional $3,000 in inventory for each succeeding year of the project. If the shop's tax rate is 35 percent
and its discount rate is 9 percent, should C buy and install the machine press?
560,000*0.2*/(0.2+.090)=135172.41=A
(1+0.3*0.09)/1.09=0.9587=B
80000*0.2*0.35/(0.2+0.09)=19310.34=C
1/1.09=0.7084=D
PVCCATS=AxB-CxD=115911.97
Reveues do’t eter ito our analysis
Initial investment=560000+20000=580000
OCF=210000(1-0.35)=136000
CFFA=136500-3000=133500
NWCT=20000+4x3000=32000
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Document Summary
Revenue generating project: company x is planning a project requiring ,000 investment in equipment (class 16, d=40%). Nwc stays at the same level of ,000 for 7 years of the project live. The equipment can be sold after 7 years for estimated ,000. Required return is 12. 5%, marginal tax rate is 45%. Esti(cid:373)ated prese(cid:374)t value of after tax operati(cid:374)g i(cid:374)co(cid:373)e is (cid:1008)(cid:1013)(cid:1009),(cid:1009)(cid:1008)(cid:1012). (cid:1007)(cid:1007). Investment- -340,000: nwc= -55000, pv of nwc recovery-, pv of salvage value-, pv of (s-c)*91-t)-495,548. 33. Pv of cca tax shield- 98,820. 49: npv= 256,368. 25, use the formula- cannot use casio calculator- use texas instruments calculator, pv of nwc recovery= 55,000/(1+0. 125)7 = 23,115,43, pv of salvage= 75,000/ (1+0. 125)7= 32, 884. Firm c is considering a four-year project to improve its production efficiency. Buying a new machine press for ,000 is estimated to result in ,000 in annual pre-tax cost savings.
